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Attracting Investors

Richard Branson on Convincing Investors to Fund Your Tech Start-up

No matter how qualified the founders are most will not succeed.

Richard Branson

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Richard Branson Entrepreneur

Q: How do you filter all the invitations to invest that you receive? Do you focus on just a few issues? – Felipe Fleiderman V., Chile

In recent years, I’ve admired the speed at which some Web-based start-ups have launched their companies and found their customers.

After all, we at Virgin love to shake up stodgy industries, giving customers a better experience in unexpected ways, like redesigning our Virgin Money banks so that customers can work, hang out and hold meetings in the comfortable lounges.

With the help of my terrific investment teams in London and New York, I’ve invested in a few non-Virgin start-ups in recent years. Choosing among them requires thought and care, because no matter how qualified the founders are or how much they have thought through their business plan, most will not succeed. But, over the years, I have learned to look for the same things in start-ups that I do in ideas for Virgin companies.

The list of our investments shows what I value in a company, and why these inspire me. And for entrepreneurs seeking investors for their tech start-up, here are five questions you need be able to answer “yes!” to:

1. Does your company offer a smart, simple solution that improves customers’ lives?

If I understand a start-up’s product or service on first glance, then customers will too – and if it solves a problem that needs fixing, there’s a good chance that some will buy it.

That’s why I invested in Square two years ago. It’s a company that was started by the Twitter co-founder Jack Dorsey when he was trying to help his friend, a glass-blower who wanted to sell his work but didn’t have a credit card machine.

Square’s system allows entrepreneurs to accept credit card payments via smartphone. The company says it now handles about $12 billion in transactions annually, and in 2012, it announced a deal with Starbucks, so that customers can pay for their coffees and other items using the Square Wallet app.

2. Is your company’s use of technology disruptive?

There are many companies that dress up their products by putting lights and screens on them, but don’t exactly make a difference to anyone’s everyday life. Such products may attract attention, but unless the technology adds easy functionality, the customers won’t be back a second time.

Hailo, the yellow taxi cab app, is a great example of a disruptive technology, since it’s so more efficient and responsive than our current options: trying to wave down a passing cab or placing a call to the cab company.

We chose to invest in this company because it lets passengers hail free taxis on nearby blocks with their smartphones. It helps cabbies too, since they spend about 40% of their time driving around looking for passengers.

3. Does your company offer customers greater choice and better access?

However small a company, its founders should try to expand people’s opportunities and choices.

The online coding tool Codecademy is giving anyone with an Internet connection the chance to learn basic programming skills for free. With its easy-to-use interface and lessons drawn from real-world examples, Codecademy is outshining the competition.

I decided to invest in Codecademy because many people need and will benefit from access to such skills, especially women who hesitate to enter such a male-dominated field – one in which most students tend to be men as well. Already, over 35% of Codecademy’s users are women.

4. Does your company’s product or service encourage customers to share their work or experiences?

The development of Web-based applications has enabled collaboration on a scale that was unimaginable 30 years ago. In almost every industry, more sharing is helpful and useful: between friends and family members; between colleagues, and sometimes between customers.

The best way to encourage sharing is make it fun, which is why businesses like Pinterest have found such success. This beautiful platform is all about inspiration and discovery, providing people with a quick, easy, entertaining way to share photos. It has rapidly become a household name – and inspired us to invest in their company.

5. Does your company care enough about people and the planet to use business as a force for good?

Every company can make a difference. New businesses can tackle local problems, growing businesses can tackle national problems, big businesses can tackle global problems. One example that stands out is Twitter, which activists have used to evade authoritarian leaders’ controls on communication – it has helped to topple governments.

I use Twitter to generate awareness for causes that are meaningful to me and others, like ending the war on drugs, and this is why I’ve invested in this company.

Similarly, we’ve funded Tumblr, which is one of the most popular Web destinations in the United States, and it also gives people a digital platform where they can express themselves.

These are just a few of the promising start-ups that have helped me to learn more about the challenges and opportunities faced by tech companies today.

Those that provide services that help entire communities may have built long-lasting businesses that will be influential for years to come. Does yours?

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How to Position Your Start-Up as a Sound Investment

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Richard Branson is the founder of the Virgin Group and companies such as Virgin Atlantic, Virgin America, Virgin Mobile and Virgin Active. He is the author of "Business Stripped Bare: Adventures of a Global Entrepreneur."

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1 Comment

1 Comment

  1. Cedric Jansen

    May 16, 2013 at 11:08

    It is great that there are funders willing to consider starting up ventures esspecially here in S.A. just shows that your are true pasionate Pioneers.I have been struggling to obtain financing from investors because i have not met with any investors and hope that our paths will cross Sir.R.Branson.The only strategy left to do is continue attempting to make my venture grow and to put my contact details out their in hope that you and people exactly like you would facilitate and approve funding for my Organization.The enviroment for enterprise developments is excellent and companies that have competent staff and management and the right networks will have huge turnovers surplus one can smile about boldly.Thanx ,Director of Top Billing Construction and services.Contact 0769130483 Yours grateful
    Cedric

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Attracting Investors

Access To Finance In SA: What You Need To Know

Finfind’s inaugural SMME Access to Finance Report reveals some of the biggest challenges SMEs face when trying to get finance. Understand the landscape, and you can adjust your business to obtain more finance.

Darlene Menzies

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Access to finance is a primary challenge for the majority of SME owners, particularly in the early stages. Without an understanding of the complexities of SME funding and the challenges experienced by both the providers and seekers of finance, it’s impossible to address the obstacles that are hindering increased deal flow.

Many countries have transparent data from lenders on a number of SMEs applying for loans, the reasons they are applying, financing terms, the interest rates, rejection reasons and rates, non-performing loans and factoring volumes. However, this information does not exist in the public domain in South Africa, even though it is crucial for policy-making. There is an urgent need for quality data and increased transparency to map SME’s access to finance and understand their funding challenges so that practical solutions can be developed.

Finfind has responded by publishing South Africa’s inaugural SMME Access to Finance Report. As an innovative fintech company that provides SMEs with a free funder matching service and an up-to-date database of over 420 finance products from public and private sector SME funders, Finfind has comprehensive data on the providers and seekers of finance. The report has enabled us to provide valuable insights about SME funding that can benefit policy-makers, funders and organisations involved in SMEs.

Some of the key findings of the report include:

High demand for SME finance

The SME funding gap in South Africa is estimated at between R86 billion and R346 billion per annum. It provides a compelling, largely untapped market opportunity for innovative funders who are able to develop new lending models and risk assessment tools tailored to address the challenges of this complex and burgeoning market.

Related: Small Business Funding In South Africa

Funders require new risk assessment models

Banks currently struggle to serve SMEs as they treat business (big and small) as a single market, and apply traditional lending methods that use collateral and conventional financing scorecards as a one-size-fits-all approach. These traditional instruments are detrimental to micro, very small and small businesses securing finance. For funders to close the credit gap, innovative new credit scoring models that enable more accurate risk assessment need to be designed specifically for this target market.

There is a lack of SME credit record data in South Africa

South Africa has comprehensive consumer (personal) credit record data that is well organised and regulated. However, this is not the case for SME credit record data. The credit bureaus in the country have little, and in some cases, no credit history data for SMEs. There is no regulation of SME credit record data, and no standard means of data collection (or a framework for credit records) for SMEs.

This poses a major challenge for SME lenders as they use the credit score in their risk assessments. Funders request credit reports (credit checks) from the credit bureaus to assess a business’s historic credit conduct. In the case of SME lending, funders request the credit report for both the owner and the SME, even though they are two separate legal entities.

The current system does not uphold legislation that distinguishes between the owner and the business, which means that when SMEs apply for finance, lenders rely on the credit records of individual owners to assess the risk of lending. This prejudices SMEs that might be extremely creditworthy but have owners with compromised personal credit scores.

Related: Government Funding And Grants For Small Businesses

The lack of SME finance readiness is a major hindrance to securing finance

The qualitative research shows that many SMEs are unable to access funding as they cannot provide funders with proof that they are bankable and can afford the finance they are requesting. Funders need to examine the SME’s financial records to determine that the business is viable and to assess their ability to repay the funding. To do this they require access to the SME’s latest financial statements and up-to-date management accounts including income/cash flow projections and outstanding debtors, tax clearance certificate, VAT statements and business plans amongst others.

Financial record-keeping is a major challenge for many SMEs and they are not able to produce these documents. Without these, they are unable to access finance, and are ill-equipped to make sound decisions in their business or properly manage their cash flow. Poor cash flow management often results in SMEs falling behind on VAT and PAYE commitments as they are unaware of what is owed. Many viable businesses are liquidating due to liabilities owed to SARS and other creditors as a result of poor financial record-keeping and an inability to secure funding.

Further to these key findings, the report provides valuable insights into the supply and demand for SME funding. It profiles the SMEs seeking finance by geographic location, turnover, age of business, sector, job creation, financial need and amount of finance required, amongst other key indicators. It also profiles the funders, and considers the supply and demand matches and mismatches, highlighting some of the funding gaps and opportunities in this critical sector.

About the smme access to finance report

Finfind launched the report in partnership with the SA SME Fund and its findings have been made freely available to stakeholders in the SME ecosystem. The report identifies providers and seekers of SME funding in South Africa, and the associated challenges, gaps, opportunities and potential solutions to increase funding success in this vital sector. While ground-breaking in terms of the information it provides, this initial report did not answer all the questions in this complex environment, but provides an excellent start to understanding the landscape.

Related: How To Get A South African Government Loan

The report is based on independent analysis of Finfind’s funder and SME finance seeker datasets in 2017, the largest SME access to finance research sample to date. In 2017, Finfind had a total of 126 916 visits to its platform, 81,2% of which were unique visitors. The average time spent on the site was more than five minutes per user.

The report analyses comprehensive data from more than 10 000 SME funding requests that were matched with a base of 148 funders and 328 finance offerings. Comparisons of the Finfind data with data from SARS, GEM SA and StatsSA studies show that the Finfind data is representative of the SME market and that the report findings can be generalised for SMEs in South Africa.

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Attracting Investors

Looking For Funding? Try Manufacturing

There are over 200 national incentives for the industrialisation of South Africa. Can you tap into grant funding to grow your business?

Nadia Rawjee

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Many people ask me why the focus of public investment in SMEs and business is so heavily weighted on the manufacturing sector?

The reality is that investment in industrialisation results in a multiplier effect in jobs, foreign earnings through exports and increased tax revenues. Countries that focus on industrialisation have proven its potential to stimulate economic growth and address social challenges.

If you’re looking for opportunities and the support needed to realise these opportunities, manufacturing is a good place to start. The Department of Trade and Industry (DTI) offers several manufacturing-based incentives and grants.

Below are the ten key general principles associated with the DTI incentives:

1. Matching concept

DTI grants are based on a ‘matching’ or ‘co-funding’ principle, which requires an applicant to invest a portion of the funds required for the project for which funding is being requested. The DTI will fund a portion of the project qualifying costs (anywhere from 10% to 90% depending on the specific fund) on condition that the applicant can prove a source of the remaining portion. The source of the difference can be debt, equity or any other form of funding.

 2. Qualifying/allowable investments or activities

The DTI sets rules for what can be funded by way of a grant (qualifying costs). These may differ based on the incentive, but the general rule is that the main application of grant funding is for plant, machinery, tools and equipment. Land and working capital will not qualify and would form part of the co-funding.

Related: How Investors Choose Who To Invest In

3. Project size

This refers to the full project size and includes all costs involved in implementing the project. All costs include capital expenditure (e.g. plant, machinery, tools and equipment), working capital (e.g. salaries, wages, stock etc.) and other costs including, but not limited to, land, vehicles, business development and certifications.Not all costs will qualify for funding from an incentive.

4. Bankability

Projects are evaluated to determine their bankability. The DTI aims to ensure that the principles applied in an application and business plan are realistic and will result in a sustainable business and/or project. In evaluating bankability, the DTI will look at the ability and know-how of the team and will require the applicant to show proof of market.

Proof of market is demonstrated by off-take agreements, purchase orders, contracts or letters of intent.

5. Timelines

Incentives are strategic funding and, as such, are not an appropriate source of funding for distressed businesses or businesses with short timeframes. This funding should be viewed as strategic funding. The DTI may provide timelines for processing applications, however, applicants must be prepared for timelines longer than those indicated. Applications may take anywhere from three to 12 months to be processed and approved.

6. Approval prior to investing

Investments made prior to the approval of an application will be non-qualifying investments. This means that an investment made before receipt of an approval from the DTI cannot be recuperated. This will be enforceable even if the investment made formed part of an application that was approved.

7. Milestone based claims

The DTI will make payments based on project milestones as indicated in an application. Each fund may define its own milestone parameters.

Related: Who Would Invest In Your Start-up, And Why?

8. Rebated claims

Claims are rebated to applicants. This means that an applicant must first invest, in line with its application, and then submit a claim for the approved investment. This principle demonstrates the importance of securing co-funding, which will be used to initiate the project.

9. Tax free grants

Grants awarded and paid are tax-free.

10. Equity substitution in nature

As grants are not repayable, they can be considered equity for purposes of securing debt. Most debt funders require a portion of equity from an applicant to lower the risk of debt. Debt financiers will consider a grant as an equity contribution, allowing applicants to unlock debt that would otherwise not have been available.

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Attracting Investors

6 Steps To Ensuring You Meet Your Funder’s Mandate

Find your funder, approach the right people, and tick all the boxes.

Diana Albertyn

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1. Determine why you need funding

According to Quinton Zunga, founder and CEO of RH Bophelo, a special purpose acquisition company with interests in the healthcare sector, many business owners do not understand cash flow and its impact on the operations of a business. “A good idea without enough cash flow is not sustainable,” he says. “You have to prepare the business for the worst-case scenario and ask yourself ‘what if things don’t work out my way? Do I have a plan B?’ Don’t assume you’ll be able to access finance to save the business if your cash flow is poor.”

The reality is that too many business owners apply for funding because their working capital is under strain, customers owe them money or their margins are too low.

“There’s a big difference between funding that will help you grow your business, and trying to plug a self-inflicted cash flow problem,” agrees Kumaran Padayachee, CEO of Spartan SME Finance, an alternative funder.

The key to growth funding can be summarised in one sentence: Will this help me make money? If the answer is yes, you’ve ticked the growth-funding box. If you’re not sure, relook your financials and forecasting. If the answer is no, you’re trying to solve a cash flow problem that will not be fixed by taking on more debt funding.

“As a funder, we care about what entrepreneurs want the money for,” says Kumaran. “We look at business models and strategy. We take a view of the entire picture, which gives us insight into whether the funding will be used in a growth context, or to plug a gap created by a strategy, cash flow, sales, marketing, management or an access-to-market problem.”

The real insight is that it shouldn’t only be up to funders to determine the answers to these questions, but business owners themselves. If you understand why you need funding, one of two things will happen: You’ll realise there’s a problem in the business that funding won’t solve, and you can begin working on it; or you’ll be prepared when you apply for funding, increasing your chances of securing the finance you need.

The reality is that too many business owners apply for funding because their working capital is under strain, customers owe them money or their margins are too low.

Related: Government Funding And Grants For Small Businesses

2. Understand the funding landscape

paul-jackson

Different sectors, industries and funders have their own rules and mandates. To understand the funding you’re trying to access, you need to first understand the sector you’re in, and the funding rules 
that apply.

For example, property is a long-term investment and funders in this space require a commitment of at least five to 15 years. TUHF, which is a specialised residential property finance company, also requires 
an equity contribution, as it does not offer 100% financing.

“Funding is usually made up of two components: Financing (loans) and equity (owner’s contribution),” says TUHF’s CEO, Paul Jackson. “The purchase price of the property, the costs of refurbishment and the amount of money the client can contribute of his own money are the three main contributing factors that determine how much financing the client will need to 
apply for.”

More importantly, entrepreneurs approaching TUHF are dealing with industry experts operating within a niche space. This is true of most funders, and should be carefully considered by business owners.

When you’re considering your growth options, focus on what you absolutely need to push the needle, and make do with what you can as you build up your pipeline.

“In every case ask the question: Do the costs involved in accessing the finance make sense? Will this help drive growth? How? Once you’ve ticked those boxes, consider all your funding options. There are a lot of solutions available to you, from bank funding, which is the cheapest to access but requires a lot of collateral, to private equity funding, which involves giving away equity in the business,” says Kumaran.

“Alternative funders like us play in the middle of these two traditional options. Alternative funders tend to be niche and specific, focusing on specific sectors or industries. They carry more risk and don’t require collateral, which is why they’re more expensive than banks, but they bring industry and sector-specific insights as well — and it’s debt funding, which means you aren’t giving away equity in your business. Their processes tend to be efficient as well, largely due to the niche nature of the funder. When you’re ready to grow, find a funder that matches your needs and understands your business.”

3. Start early

“Raising capital patiently is key, because acquiring funding quickly but unwisely could lead to repayment issues,” says Quinton. “Some funding can only be accessed later and you need to be patient, or you may find yourself struggling to pay it off before your business has grown big enough to do so. You need to focus on preparing a business plan and understanding the cash flow impact of the decision you make. Look for an advisor or banker to work with you on the business plan.”

4. Know what funders look for

All funders are looking for specific business and personal traits in the business owners they back. Quinton values integrity and honesty, a good understanding of the business they are in, and personal commitment. “Funding a new business is always tough because the entrepreneur may not have experienced all the sides of the economy and may not be accustomed, mature and ready enough to go to the next level. This is where a steady track record is advantageous,” he adds.

Related: Attention Black Entrepreneurs: Start-Up Funding From Government Grants & Funds

Paul agrees. For TUHF, the entrepreneurial character and competence of the borrower is of paramount importance. “We follow a character-based lending approach,” he says.

“A client that displays certain characteristics is considered a better investment option. These include entrepreneurial qualities; an open-minded attitude that is willing to take advice; someone who is self-disciplined and manages the cash flows of the property to the benefit of the property, and not for personal use. Other sought-after characteristics include someone who keeps their tenants happy by keeping the property clean and well maintained, providing all-round good customer service; is committed to doing everything in their power to ensure the success of the deal; is up-to-date on utilities; and directly involved in the property management, even if there is an external service provider.”

5. Avoid red flags

Every funder has red flags they watch out for and they will walk away from a deal if they find them. “A bad past business track record indicates the business owner’s legal, financial, and HR values,” says Quinton. “These are important to us. Without some ethos and standards, you end up not being on the same page as your investor. I usually ask about the entrepreneur’s previous partnership — how they handled it and why it ended. Desperation is also a deterrent, as is a poor business case.”

Paul agrees. The driving factor in TUHF’s business is the borrower’s aptitude in property. “Real estate competency is therefore a key characteristic of TUHF borrowers. It’s important that the building is properly matched to the skill and entrepreneurial competence of the borrower. Some of the conditions we evaluate include a credit record, ensuring the borrower is not under debt review, or blacklisted; returned debit orders on a client’s bank statement; track record and state of repair of the client’s other properties; having the right risk attitude, which in our case is considered, cautious and patient; taking the time to do due diligence; and property fit — does the size and nature of the project match the client’s talents and experience. It’s a red flag for us if one of these is mismatched.”

6. Don’t give up

The most important step in funding is perseverance. Many business owners knock on multiple doors and make numerous applications before finding a funder that fits. This could be because red flags need to be addressed and financial management accounts followed, but each time you approach a funder you learn something new that you can implement in your business.

“Don’t view failure as a disaster,” says Quinton. “Figure out which stage of the lifecycle your business is in and align that to your commitments.”

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